Where Is The London Whale? Data Don't Show JPM Selling Most Of The Position

Agustino Fontevecchia
, ContributorFrom global billionaires to art market fraud, I cover power and moneyOpinions expressed by Forbes Contributors are their own.

JPMorgan CEO Jamie Dimon testified before Congress and put on an image of strength, he was also there managing expectations - Image credit: AFP/Getty Images via @daylife

The amazing story of the London Whale and JPMorgan’s chief investment office (CIO) gets more interesting, and complicated, by the day. On Thursday, the New York Times reported the losses could hit $9 billion, while last week CNBC’s Kate Kelly cited “people familiar with the matter” confirming JPMorgan had sold-off between 65% and 70% of the loss-generating position.

As JPMorgan’s shareholders wait for the July 13 earnings release and conference call for a little clarity, a thorough analysis of trading data by Alphaville’s Lisa Pollack suggests it is highly unlikely that JPMorgan’s CIO had actually offloaded such a huge chunk of its position.

This, in turn, raises the possibility that the $9 billion estimate “could easily be an upper bound loss estimate straw man to set expectations very low, sending the stock soaring when the 'final' [announcement] comes in at ~$5 billion, courtesy of other well-known 'masking' techniques such as loan loss reserve release and DVA benefits,” as ZeroHedge’s Tyler Durden put it.

From the start, JPMorgan CEO Jamie Dimon tried to minimize the impact of what went from a “tempest in a teapot” to a potentially $9 billion loss. At the middle of it all are a series of trades, reportedly executed by London-based trader Bruno Iksil, that due to their massive size, distorted markets, catching the attention of hedge fund managers who chased the aptly nicknamed Whale and made a killing.

It is pretty clear that this happened, but what isn’t clear is what JPMorgan is doing to fix it, as very little about the trade has been revealed. Dimon had said they would be patient in unloading the position in order to maximize shareholder value, noting they would probably be unwound by early next year.

Last week, though, Kelly reported they had already unloaded most of the position, which was made even more credible by trading data that showed a spike a massive spike in trading volume in the CDX. NA. IG. 9, which regulators have already confirmed were related to JPMorgan’s CIO losses, according to Alphaville’s Lisa Pollack.

The IG. 9, an index of 121 North American corporate, saw trading activity hit an $31 billion, the highest level since data has been measured, according to Pollack. Iksil had gone long the index by selling an outsized amount of protection against it, to the point where the skew, or the measure between where the index should theoretically be trading at (based on its underlying components) and where it actually trades, got too big for too long. Hedge fund managers put their bets against Iksil, which proved prescient as the economic outlook worsened dramatically, putting the Whale deep in the red.

Pollack broke down the numbers, released with a one week delay by the Depositary Trust and Clearing Corporation (DTCC), and failed to find evidence that JPMorgan had sold that much. Net notional data, which essentially shows how many open positions are at risk for the IG. 9, showed an “unprecedented” increase since the end of last year, going from about $80 billion to $150 billion in May. “We now know that this is very likely down to the portfolio of JPMorgan’s CIO and all of those who chased said Whale, taking advantage of price distortions in its wake,” explained Pollack.

While no one knows exactly what JPMorgan’s full trade was, as it was surely composed of more than one position, the unprecedented jump in net notional activity for that index suggests that was one of Iksil's big moves. We haven’t seen a huge drop in the net notional amount last week, though, suggesting something is off if indeed they had offloaded the position then. Net notional has has only fallen gradually, "which implies some unwinding by those on either side of the trade, but it’s nothing like the jump we’ve been expecting”.

Furthermore, the aforementioned skew had already fallen in early May, and has since stayed down, suggesting the trade is being exited quietly, Pollack noted. Even looking at data for tranches (“a highly leveraged, risky way to take risk on a part of the index” which are “a good candidate for the trades”) proved nothing unremarkable, as did analyzing different maturities of the index.